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The dynamics of investment and labour demand: Theoretical issues and an application to the Dutch manufacturing industry

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  • Palm, Franz C.
  • Peeters, Marga
  • Pfann, Gerard A.

Abstract

Lucas' (1967) adjustment costs model and Kydland and Prescott's (1982) time-to-build model induce mutually exclusive time-series properties that can be recovered from data. This paper investigates three variants of a theoretical model which give insight into the parameter restrictions implied by each of the two sources of dynamics separately. The variants, which simultaneously determine the interrelated demand for capital structures, equipment and labour, are analyzed using quarterly Dutch manufacturing data for the period 1971-1990. In a model with gestation lags, the additional dynamics induced by adjustment costs are not significant. This is not surprising since the economic interpretation of adjustment costs in addition to time-to-build is not obvious. Non-nested hyotheses tests, however, show that the two specifications imply mutually exclusieve time series properties which are statistically significant.

Suggested Citation

  • Palm, Franz C. & Peeters, Marga & Pfann, Gerard A., 1993. "The dynamics of investment and labour demand: Theoretical issues and an application to the Dutch manufacturing industry," MPRA Paper 33042, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33042
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    References listed on IDEAS

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    Cited by:

    1. Marga Peeters, 1998. "Persistence, Asymmetries and Interrelation in Factor Demand," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(4), pages 747-764, December.

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    More about this item

    Keywords

    time-to-build; adjustment costs; capital; labour;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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